South African insurers pulling out of these areas

Rising risks associated with climate change are putting insurance companies out of business, damaging South African properties, and threatening the economy. 

This is according to Soul Abraham, Chief Executive for Retail at Old Mutual Insure, who recently spoke at the African Insurance Exchange Conference.

Abraham said the sector has already seen several non-life insurers offering personal and commercial insurance being forced to shut down due to rising risks. 

“Further casualties are inevitable if all stakeholders do not contribute to mitigating climate change risks,” Abraham said.

The increasing frequency and severity of smaller catastrophic events have significantly impacted the South African insurance industry.

In 2023, Old Mutual Insure reported ten weather-related claims, with three significant incidents resulting in millions of rands in damages.

These major incidents included February’s Vaal River floods, severe storms in the Western Cape in June and again during the Heritage Day weekend in September, as well as hailstorms across Gauteng and Mpumalanga in November 2023.

Although these events happened across the country, the Western Cape and KwaZulu-Natal were particularly vulnerable, with these regions making up more than half of the year’s severe weather events.

These events have led to several challenges for insurers, including more frequent weather-related claims, higher reinsurance costs, and increased premiums for consumers.

Data from the company shows that the frequency of severe weather events has increased from 6 to 36 per decade since 2012.

This has led some insurers, particularly in high-risk areas like KZN, to withdraw from markets vulnerable to flooding. 

According to Stanlib, 2023 was the hottest year on record, with a new high of 63 natural disasters worldwide, each of which incurred an economic cost of more than $1 billion (R17.77 billion).

International insurers have also started pulling out of areas like California in the US due to the risk of flooding and wildfires.

Abraham explained that there are several strategies insurers can use to combat these challenges.

Firstly, insurers need to develop innovative ways to accurately assess climate-related risks, which will help in setting appropriate policy prices and underwriting.

“In addition, premium adjustments are necessary to reflect higher risks, especially in regions more susceptible to climate events like flooding and wildfires,” he said. 

“However, insurers must also recognise the economic climate that policyholders find themselves in and balance this with the critical safety net that insurance provides.”

Abraham explained that insurers could make selective coverage decisions based on specific suburbs or properties, even turning down new businesses in highly exposed areas. 

In extreme cases, insurers might have to withdraw from high-risk areas altogether, though this should be a last resort.

Companies can also make use of innovative data sources and AI-powered analytics to fully understand the expected climate impacts and incorporate these insights into their risk models.

Satellite imagery can monitor emerging wildfire risks, and location-specific flood data can help guide insurers in making underwriting decisions.

Another major risk in South Africa is the societal impact of millions of uninsured individuals, Abraham added.

Swiss Re data shows that 71% of South Africans are uninsured by the short-term insurance industry, leaving personal property vulnerable to climate damage. 

This large protection gap is due to differences in purchasing power and willingness to buy insurance. 

Globally, protection gaps vary, with developed countries showing gaps from 21% in the UK to 56% in Germany, while India has one of the highest at 91%.

“When a significant proportion of a country’s population is not insured, it means that in the event of a climate catastrophe, the government bears the burden of rebuilding and repairing the damage done to the affected area,” Abraham said.

“But governments globally, and in South Africa, are financially strained when providing relief or covering losses from extreme weather events, affecting financial stability.”

Abraham explained that a large protection gap like this has broader implications. 

“A large protection gap hampers economic recovery following disasters, reducing an economy’s resilience,” he explained.

“Recent catastrophes, such as the earthquakes in Turkey, Syria, and Morocco, and the wildfires in Maui, have underscored the severe human and economic impact of the insurance protection gap.”

“The collective effort of insurers, policymakers, and the public is crucial in ensuring that the impacts of climate change remain manageable and that we can sustain a viable future for all.”

The table below shows the 2023 weather catastrophes and duration based on data from Old Mutual.

Event	Duration
Countrywide storm	7 days (9-15 Feb)
Vaal River floods	7 days (18-24 Feb)
Empangeni Richards Bay hailstorm	7 days (3-9 Apr)
Johannesburg earthquake	1 day (11 Jun)
Western Cape storm	1 day (13-19 Jun)
Durban storm	1 day (27 Jun – 3 July)
Eastern & Western Cape coastal storm surges	7 days (16-22 Sept)
Western Cape storm	7 days (24-30 Sept)
Ladysmith hailstorm	7 days (24-30 Sept)
Gauteng Mpumalanga Hailstorm	1 day (1 Nov)